India raises gold import tax to cut deficit

India, the world’s largest bullion buyer, raised taxes on gold imports to reduce a record current-account deficit and moderate demand for the precious metal that’s rallied for 12 straight years.

The duty on gold and platinum imports will rise to 6% immediately from 4%, Economic Affairs Secretary Arvind Mayaram told reporters in New Delhi today. The tariff will be reviewed if imports moderate, he said. Gold was 0.3% higher after the announcement.

Increased taxes may reduce gold demand in Asia’s third-largest economy after prices jumped 7.1% in 2012 as investors and central banks boost purchases. About 80% of India’s current-account deficit, the broadest measure of trade, tracking goods, services and investment income, is due to gold imports, according to the Reserve Bank of India.

“Consumption and imports will fall definitely,” Bachhraj Bamalwa, chairman of the All India Gems & Jewellery Trade Federation, said in a phone interview from Kolkata. “This will also help the government reduce the current-account deficit.”

Gold for immediate delivery climbed to $1,689.07 an ounce by 1:41 p.m. in London. Platinum jumped 0.3% to $1,675 an ounce.

Mutual Funds

Domestic mutual funds, which offer gold-backed exchange traded funds, will be allowed to deposit part of the bullion they hold with banks to boost availability for jewelry and gem making, Mayaram said.

“The advantage will be that a part of the gold lying in stock will be brought into circulation and will partially meet the requirements of the gems and jewelry trade,” Mayaram said. “It is hoped that consequently there will be a moderation in the quantity of gold that is imported into the country.”

Last March, India doubled the tax on purchases of gold bars and coins to help narrow the current-account gap. Demand for gold still picked up “significantly” in the July-to-September quarter, the Reserve Bank of India said in its biannual Financial Stability report in December.

The current-account deficit widened to $22.3 billion in the three months to Sept. 30 as a faltering global economy hurt exports, the central bank said Dec. 31.

Gold Purchases

Gold imports are “a huge drain,” Finance Minister Palaniappan Chidambaram said Jan. 2. Imports by India rose for the first time in five quarters in the three months to Sept. 30, according to the World Gold Council. Purchases jumped 9% to 223 metric tons in the third quarter of 2012 from 205 tons a year earlier, the producer-funded group said on Nov. 15.

Bullion in Mumbai surged to a record 32,464 rupees ($604) per 10 grams (0.35 ounce) on Nov. 26 and gained 13% last year. The contract for February delivery rose 0.6% to 30,775 rupees on the Multi Commodity Exchange of India Ltd.

“In India, people have more belief that gold is the best commodity they can invest in,” said Mohit Kamboj, president of the Bombay Bullion Association. “The increase in duty is too small. The tax won’t impact imports and it will only help increase government’s revenue.”

Buying gold is considered auspicious during religious festivals and weddings in India. The festival season starts in August and ends in November, and is followed by the wedding season.